DA v Secretary of State for Work and Pensions (CSM) (Child support : applications) [2014] UKUT 142 (AAC)
UKUT-AAC
DA v Secretary of State for Work and Pensions (CSM) (Child support : applications)
[2014] UKUT 142 (AAC) · 2014-03-25
[29]… In the course of his judgment Judge Mesher adverted to another matter which, in this instance, is dividing the judges of the Upper Tribunal. The problem arises in this way. Where the child support decision maker arrives at his own conclusion about the level of the father's taxable profits, he is nonetheless obliged to deduct "any income tax relating to the taxable profits from the self-employment determined in accordance with sub-paragraph (3)" as well as "any National Insurance contributions relating to the taxable profits from the self-employment determined in accordance with sub-paragraph (4)" as paragraph 2A(2) and paragraph 7(3) require. If the parent's taxable profits have been assessed by the HMRC and his income tax relating to those profits also determined by the HMRC, then what figure for tax must be deducted – the notional tax due on the child support figure for earnings or the actual tax paid or payable on the HMRC's assessment of those profits?[30]Judge Mesher posed the question and inclined to answer it by following Judge Howell in DB v CMEC [2011] UKUT 202 (AAC) by allowing the deduction of actual income tax rather than notional income tax. Judge Turnbull took the opposite view in WM v CMEC [2011] UKUT 226 (AAC) . In his skeleton argument Mr Buley questioned the correctness of Judge Mesher's approach. There was originally no application for permission to appeal that part of the decision and Black LJ had in any event limited this appeal to the ground I have already identified. Nonetheless we were invited to express our views about it. The second respondent was present in court but not represented; nor was the father. The mother's position, with which one could have sympathy, was that she would accept a reduction in the monies paid to her if only she could be assured that she would receive something soon and that she would not have to endure another round of battle. The father, whose battle is still against the adverse findings of fact made by the FTT, eventually realized he should not turn away a gift horse. So in the end we gave permission to appeal out of time on this point and I would allow the appeal to that extent. If the Child Support Officer is going to increase the profit above the level accepted by the HMRC then his responsibility is to deduct the income tax (and NIC) which would be payable on that level of profit. That is why I highlighted the definite article, " the ", in paragraph 2A(2) to show that the deduction of tax must be related to the taxable profits which have been established to be the actual earnings of the parent. To borrow Mr Buley's phrase, it is as simple as that. Consequently I would allow the appeal and remit the case to the Secretary of State for a recalculation of the child support assessment but only so as to allow for a deduction of the income tax and national insurance on the notional surplus between the earnings found by the First Tier Tribunal and the earnings accepted by the HMRC. …” 20. It Is not difficult to provide a policy rationale for this approach. Earlier in his judgment, when considering whether the Commission was entitled to find that earnings were higher than HMRC had accepted them to be, Ward LJ had commented that it would be easier if the Commission had simply to use the HMRC figure and that it was unsatisfactory that two Government departments should reach different decisions. The counter-argument, of course, is that it is grossly unfair for the other parent to be bound by a decision to which he or she was not a party. Nonetheless, the implication of the child support authorities finding that a person’s earnings were higher than was accepted by HMRC is that they consider that that person has failed to pay the correct amount of tax and National Insurance contributions but remains liable to do so. Deducting tax and National Insurance contributions at least leaves open the possibility of HMRC making a new assessment that is consistent with the child support decision and everyone being left in the position they would have been in had the appropriate tax and National Insurance contributions been paid at the proper time. A related consideration is that there is no compelling argument for the person with the care of a child being given a share of the benefit derived from the non-resident parent’s wrong-doing at the expense of HMRC. It may be galling for the person with care to see the non-resident parent have all the benefit and it might, as Judge Turnbull suggested in WM v CMEC (to which Ward LJ referred), be possible for a variation to be made under regulation 20 of the Variations Regulations in some circumstances, but the person with care is no worse off than he or she would have been had the tax and National Insurance contributions been paid. It is HMRC that is out of pocket. 21. In any event, although the statutory references in paragraphs 29 and 30 of Ward LJ’s judgment were to paragraphs of Schedule 1 to the Child Support (Maintenance Assessments and Special Cases) Regulations 1992, the Court of Appeal’s approach must apply equally to deductions to be made from the “gross earnings” of a self-employed earner under paragraph 7(4) and (5) in Part III of Schedule 1 to the Maintenance Calculations Regulations for the purpose of ascertaining his or her “net income”, or from “taxable earnings” where earnings of a self-employed earner are calculated under paragraph 8 (see paragraph 8(2)(c) and (d), read with paragraph 8(4)). 22. However, in relation to employed earners, the language of Part II of the Schedule, relating to the earnings of employed earners, is slightly different. So far as is material, paragraphs 3 to 5 provide – “ 3. –(1) The net weekly income of the non-resident parent as an employed earner shall be— (a) his earnings provided for in paragraph 4 less the deductions provided for in paragraph 5 and calculated or estimated by reference to the relevant week as provided for in paragraph 6; or (b) where the Secretary of State is satisfied that the person is unable to provide evidence or information relating to the deductions provided for in paragraph 5, the non-resident parent’s net earnings estimated by the Secretary of State on the basis of information available to him as to the non-resident parent’s net income.(2) Where any provision of these Regulations requires the income of a person to be estimated, and that or any other provision of these Regulations requires that the amount of such estimated income is to be taken into account for any purpose, after deducting from it a sum in respect of income tax, or of primary Class 1 contributions under the Contributions and Benefits Act or, as the case may be, the Contributions and Benefits (Northern Ireland) Act, or contributions paid by that person towards an occupational pension scheme or personal pension scheme, then, (a) subject to sub-paragraph (c), the amount to be deducted in respect of income tax shall be calculated by applying to that income the rates of income tax applicable at the effective date less only the personal relief to which that person is entitled under Chapter I of Part VII of the Income and Corporation Taxes Act 1988 (personal relief); but if the period in respect of which that income is to be estimated is less than a year, the amount of the personal relief deductible under this paragraph shall be calculated on a pro-rata basis and the amount of income to which each tax rate applies shall be determined on the basis that the ratio of that amount to the full amount of the income to which each tax rate applies is the same as the ratio of the proportionate part of that personal relief to the full personal relief; (b) subject to sub-paragraph (c), the amount to be deducted in respect of Class 1 contributions under the Contributions and Benefits Act or, as the case may be, the Contributions and Benefits (Northern Ireland) Act, shall be calculated by applying to that income the appropriate primary percentage applicable on the effective date; (c) …. 4. – (1) Subject to sub-paragraph (2), “earnings” means, in the case of employment as an employed earner, any remuneration or profit derived from that employment … 5. – (1) The deductions to be taken from gross earnings to calculate net income for the purposes of this Part of the Schedule are any amount deducted from those earnings by way of— (a) income tax; (b) primary Class 1 contributions under the Contributions and Benefits Act or under the Contributions and Benefits (Northern Ireland) Act; or (c) …. (2) For the purposes of sub-paragraph (1)(a), amounts deducted by way of income tax shall be the amounts actually deducted, including in respect of payments which are not included as earnings in paragraph 4.” 23. Where paragraph 3(1)(a) applies, paragraph 5(2) requires that there be deducted only tax actually deducted. Paragraph 3(1)(b) envisages net earnings being estimated by reference to information about the person’s net income where there is uncertainty as to amounts deducted. Those provisions reflect the fact that an employed earner’s earnings are usually received net of tax and National Insurance contributions that have been deducted at source by the employer under the PAYE regime, whereas a self-employed earner’s profit represents gross receipts less expenses but before the payment of taxes. When one is estimating what a person has actually received, it is therefore likely to be after the payment of tax and National Insurance contributions when a person is employed but before the payment of tax and National Insurance contributions when a person is self-employed. However, paragraph 3(2) makes provision for cases where it is an employed earner’s gross income that must be estimated and it then makes provision for the deduction of a notional or estimated tax and National Insurance liability. 24. Mr Cooper argued that the Schedule must be construed so that it achieves what is its clear purpose in a consistent manner as regards each type of income. He pointed out that it is headed “Net Weekly Income” and that paragraph 1 provides – “ 1. Net weekly income means the aggregate of the net weekly income of the non-resident parent provided for in this Schedule.” “Net weekly income” is the figure that determines a person’s liability for child support maintenance under Schedule 1 to the Child Support Act 1991, as in force in relation to this case. It would be inconsistent, submits Mr Cooper, if tax and National Insurance contributions were to be deducted from a self-employed earner’s earnings and not those of an employed earner. 25. I agree with Mr Cooper’s general approach but it seems to me that the question that arises in the case of an employed earner is whether the earnings that have been calculated are themselves gross or net of tax and National Insurance contributions. If net, then clearly no further deduction in respect of tax and National Insurance contributions falls to be made. Accordingly, the Court of Appeal’s decision in Gray does not automatically lead to the conclusion that tax and National Insurance contributions must be deducted from an estimated sum of employed earner’s earnings. One must first consider the nature of the sum that has been estimated. 26. In the present case, the First-tier Tribunal calculated the relevant part of the father’s annual earnings by reference to what he had received over a shorter period from the company from which he also received a salary. Such receipts ought, if attributable to additional earnings as an employed earner, to represent net earnings and, where earnings are calculated in that way, it may well be natural to assume that tax and National Insurance contributions have been paid in unknown amounts. The calculation would in those circumstances be one made under paragraph 3(1)(b) of Schedule 1 to the Maintenance Calculations Regulations and no further tax or National Insurance contributions would be deductable. 27. However, if it is known that no tax and National Insurance contributions have been deducted at source, a question arises as to whether there should be no deductions for child support purposes, at least in respect of tax, because the calculation is a calculation of net income under paragraph 3(1)(a), or whether the calculation is a calculation of gross income to which paragraph 3(2) applies so that deductions fall to be made under that subparagraph. Moreover, a lack of deductions at source may suggest that, in truth, the payments are not being made as employed earner’s earnings at all. The First-tier Tribunal failed to grapple with those issues. In particular, it did not address the question whether the estimated income of £26,520 p.a. that the father received from the company in addition to his salary was paid as employed earner’s earnings or as a self-employed earner’s earnings. 28. Thus, the First-tier Tribunal erred in law both in making a variation, rather than taking the additional earnings into account in the basic calculation, and in failing to make any findings as to the nature of those additional earnings. Since the latter error was material to deciding whether or not tax and National Insurance contributions were deductible from the additional earnings when calculating the father’s net income for child support purposes, I am satisfied that it was an error that requires the First-tier Tribunal’s decision to be set aside. 29. However, I am satisfied that I can properly re-make the decision rather than remit the case to the First-tier Tribunal and that I should do so on the basis of the First-tier Tribunal’s finding that the father did have earnings of £26,520 p.a. in addition to his salary and that those earnings are to be taken into account in the basic calculation of child support maintenance. I have not accepted the challenges to that finding made in the father’s two grounds of appeal and, even on the father’s own account, the sums received show an income that was plainly relevant to the child support calculation. It is true that the First-tier Tribunal did not give specific reasons for rejecting the father’s account, but it was effectively required to choose, on the papers, between the mother’s case that, for the reasons she advanced, it could be seen that he had far more to do with the company than he was disclosing and, on the other hand, the father’s case as to the true source and reason for the payments. It is plain that, to the extent that it was supported by evidence that the father had received additional payments, it accepted the mother’s case because it accepted her arguments and it rejected the father’s case because, if it were true, it would have expected it to have been supported by full documentation. In the circumstances of this case, where there is nothing very surprising about it having accepted the mother’s arguments, it was not, in my judgement, required to give further reasons. Although it has not featured among his grounds of appeal to the Upper Tribunal, the father also stated in a letter to the First-tier Tribunal dated 8 November 2010 – i.e., after his letter of 21 October 2010 providing documents in response to the decision – that he had not attended the hearing on 4 October 2010 “due to childcare issues as my partner works for an airline and due to Spanish strikes was stuck in Europe and unable to get home”. However, I am quite satisfied that, had he intended to attend the hearing, he would have either made other childcare arrangements or contacted the First-tier Tribunal to seek a postponement. I am reinforced in that view by his delay in raising the issue and the fact that, despite at one stage being represented by solicitors, he did not pursue an application to the First-tier Tribunal for the setting aside of its decision due to his not having attended the hearing. 30. Accepting, therefore, that the claimant received £26,520 from the company in addition to his salary, what was the nature of the payments? That is the sum that it was estimated he had actually received and it is quite clear that no tax and National Insurance contributions had been deducted because each of the payments recorded in the bank statements was a round number, quite apart from it being the father’s own case that the payments did not require tax and National Insurance contributions to be paid. Therefore, if the income was employed earner’s earnings, I am quite satisfied that this was a calculation of net earnings and that paragraphs 3(1)(a) and 5 of Schedule 1 to the Maintenance Calculations Regulations would require no deduction of tax and National Insurance contributions before the sum was taken into account as net income. 31. However, the sums paid to the father were paid separately from his salary and he was neither a director of, nor a shareholder in, the company at the material time. In these circumstances, the making of payments without the deduction of tax and National Insurance contributions appears to me to be more consistent with the arrangement being one under which the father was employed as an independent contractor rather than as an employee, albeit that he was simultaneously also a part-time employee. Accordingly, I am satisfied that the relevant payments were, in the father’s hands, receipts from self-employment. The First-tier Tribunal rejected the father’s case that he was providing refurbished material handling equipment because there was no material documentary evidence supporting the case and there is equally no documentary evidence of other expenses to be deducted. However, in the light of Gray , tax and National Insurance contributions fall to be deducted on the basis that the £26,520 p.a. was the father’s taxable profit from self-employment. To that extent, the father’s appeal is successful. Mark Rowland 25 March 2014